What to Do with Those Old 401(k)s

Most of us in in the workforce have had multiple employers over our careers. It almost always makes sense to contribute to your 401(k) or equivalent retirement plan. You get the tax deferral (or tax freedom if you have Roth contributions), the employer match in most cases, and the benefit of regular investing over decades.

But once you move on to your next employer, there’s a choice to made with your old 401(k). In my experience, most leave their old 401(k) behind. That may be the right thing to do, but you should take a moment when changing jobs to consider the right course of action.

Before we dive into the details, we’re not limiting our discussion to 401(k)s as we want to consider other work retirement plans. This includes 403(b) and 457 plans available through non-profit and governmental employers, and 401(a) plans. Here are the key questions to ask when considering your old retirement plans.

Do You Have an Option to Stay (or Go)? Some retirement plans will force you to take a distribution if it’s below a certain balance. While they may offer the option of cashing out the plan, this will be taxed in most cases as ordinary income and may be subject to a 10 percent IRS penalty if you’re under 55 years old. This is not the best course of action! The best option for most who need to leave their old plan is to conduct a tax-free rollover to another retirement plan or IRA.

On the other hand, some retirement plans won’t let you withdraw funds, including non-governmental 457 plans. If that’s the case, keep careful records so these funds are not forgotten and do the best to direct your balance into the best investments the plan offers.

Expenses in the Plan. Over the last decade, retirement plan expenses have continued to decrease. Now we hope your total plan investment expenses are under 0.5 percent annually, with 1 percent as the maximum tolerable expense. These fees should be disclosed in your quarterly statement with your old retirement plan. There are some retirement plans with such low costs that you should strongly consider keeping at least some of your money in them. Notable examples with many Boulder County employees include the Thrift Savings Plan (TSP) available through federal government employment. CU’s 403(b) and 401(a) retirement plans also have low cost investment options, if navigated wisely.

Investment Options. When we analyze client retirement plans, we like to see a variety of investment options. By now most plans have a target date retirement fund, which is a great default option. Beyond that all-in-one-fund, a US large company stock fund, US small company stock fund, an international stock fund, and a short-term bond or stable value fund make up the minimum choices that we like to see in a client retirement plan.

Distribution Options. Work retirement plans generally have better distribution options for early retirees than IRAs. Most plans permit qualified distributions starting in the year you turn age 55, while with IRAs you need to wait until age 59 ½ unless you’re willing to wade into the details of complicated Roth conversion ladders or substantially equal periodic payments. The odd duck 457 retirement plans permit distributions before age 55, and can be a great first source of funds for early retirees.

If You Decide to Leave. Let’s say that after considering the above factors you decide to leave your old retirement plan. One easy choice for the rollover could be the retirement plan of your new employer. Use the same criteria to evaluate whether it offers a broad range of low cost options. Another option is a traditional IRA with a low cost investment company such as Charles Schwab or Vanguard can be used for a tax-free rollover from a retirement plan. A final option is an account opened in concert with a trusted and qualified financial advisor.

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